FED'S WILLIAMS: 'We can’t wait until we see the whites of inflation’s eyes'

Tempe, Ariz. (Reuters) - Now that the United States is closing in
on full employment and inflation is likely to rise to target
levels, the "next step" should be to start gradually increasing
rates, a top U.S. central banker said on Saturday.

"My forecast is that we’ll reach our maximum employment mandate
in the near future and I’m increasingly confident that inflation
will gradually move back to our 2 percent goal," San Francisco
Federal Reserve Bank President John Williams said in remarks
prepared for delivery to the Arizona Council on Economic
Education. "It makes sense, therefore, to start gradually moving
away from the extraordinary stimulus that got us here."

The comments suggest that Williams, a centrist policymaker who
was Fed Chair Janet Yellen's chief researcher when she had his
job before moving to Washington, is leaning toward support of a
December rate hike. The Fed has kept interest rates near zero for
almost seven years, and the central bank last month said it would
consider a rate increase at its Dec. 15-16 meeting, the last of
the year.

Traders boosted their bets on such a move after a government
report on Friday showed the economy added many more jobs than
expected in October, sending the jobless rate down to 5 percent,
close to or at full employment.

A Reuters poll of top bond dealers also showed a growing number
expected borrowing costs to go up next month, with 15 of 17
looking for an increase. [FED/R]

Inflation has languished below the Fed's goal for years,
prompting a few Fed policymakers to still favor waiting on a rate
increase until there is better evidence that prices are indeed
firming.

On Saturday, Williams said he believes that factors holding
inflation down, including weak oil prices and a strong dollar,
should soon ebb and allow inflation to bounce back.

"We can’t wait until we see the whites of inflation’s eyes; if we
did, we would overshoot the mark," Williams said. "An earlier
start to raising rates would also allow a smoother, more gradual
process of policy normalization, giving us space to fine-tune our
responses to any surprise changes in economic conditions."

Yellen has also said she wants rates to rise gradually.

Yet Williams stopped short of pointing directly to a rate
increase this year, saying as he often has that the data will
determine when the Fed should act.